12 December 2009

Gold : Buy or Wait?

The recent rise in the dollar, which was considered a bearish sign for equities and commodities isn't playing to perfection. On one hand we are seeing the S&P500 as well as Asian markets moving within a range, threatening to breakdown at times and breakout on others. On the other hand commodities which are more direct play nowadays to the dollar is showing the inverse correlation to some extent.

Crude which was trading above $80 has slipped to near $70, even when there has been supportive news of economic revival and less job cuts! Gold's fall has been even more pronounced as it has been a lot quicker (from 1225 to 1115 in just over a week's time). And only reason that can be associated is dollar's rally which has shaken off the weak hands. Will the dollar rally more and push gold's prices even lower, or has the gold reached strong support zone from where it can target higher levels remains to be seen. Let's have a look at what the charts say. In one of my previous post Bank Nifty : Reversal of Trend I pointed how "trend arc" breaks and similar pattern is getting formed in Gold.

In the chart above we see how gold started rising in a parabolic fashion and then broke from the trend arc support to keep falling. We have already broken the short term moving average and hopefully find support around the medium term moving average. The MACD shows that we have made a new high in negative momentum, it generally points to further lower levels after a brief rally. But one definitive thing that comes out of the chart is that gold too had been a playground of speculators off late. Strong rally and even stronger corrections are signs of leveraged activities. Only time will tell us how much of speculation was going around in the name of "hyperinflation".

Now take a look at the chart above. What we see is another parabolic rise in the chart of Gold, the only difference is the time frame. This weekly chart of Gold shows some kind of absurd rise since March without any meaningful correction. One can argue that so has done the equities, but remember this is not a sign of a healthy trend. One can expect the retest of $1000 levels which had been a resistance earlier at some point of time. Surely should be a great buy then.

I am not suggesting that gold will have a major correction, but the chances of it going higher from here are quite low compared to chances of it going lower. Buyers short and long term should be wary and definitely resist the temptation if it goes below 1100.


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